BRAMSHILL BLOG:  From the Desk of Bramshill Investments

September was an extremely volatile month in both the interest rate and credit markets. Higher than expected inflation numbers increased the outlook for interest rates as the 10-year US Treasury moved +64bps higher on the month and +132bps higher off the August lows just two months ago. This equates to a loss of approximately 12.5% in price.

The YTD returns through September for benchmark fixed income asset classes were as follows: Bloomberg US Aggregate Index (-14.61% YTD); Bloomberg US IG Corporate Index (-18.72% YTD); Bloomberg US High Yield Corporate Index (-14.74% YTD); BAML Fixed US Preferred Index (-16.79% YTD); and the Bloomberg US Municipal Index (-12.13% YTD). The Bramshill Income Performance Strategy returned -2.33% in September and has now returned -9.19% YTD. Due to the challenging investment environment, we have maintained a significant cash plus short-term treasury allocation which remains at approximately 48% of the portfolio at this time. This allocation now yields close to 3%, as the recent move in Fed funds has made our defensive investment even more attractive. We somewhat reduced our preferred allocation to approximately 26% of the Strategy as we paired positions in MS 6.5% PFD, BAC 6% PFD and DUK 5.75% PFD. Our allocation to investment grade corporates remained stable at 18% of the Strategy as we sold COF 2.6% ’23 which was trading at a very tight spread and we added RGA 7.125% (baby bond). Our municipal and high yield allocations (small reduction in loan CEFs) were fairly stable on the month at approximately 5% and 4%, respectively. Credit spreads, which experienced all-time tights or at least multi-year tights across most fixed income asset classes in 2021, have all generally widened and certain asset classes we are starting to view as historically cheap as of the end of the third quarter. We remain focused on asset classes that we still view as being relatively cheap from historical standards, yet fundamentally solid given our security-by-security probability of loss analysis. There are currently approximately 87 credits in our “bullpen buy list”, which we are prepping to buy if and when we get to our allocation target prices. We believe there are plenty of high quality credits which are trading at compelling yields and spreads at this time. In particular, we are focused on two sectors in investment grade corporates which are attractive at this time. First, 3 year maturity corporate debt with yields at approximately 6% with optimal liquidity on their balance sheets. Second, deeply discounted 30 year maturity corporates with very high quality credit metrics which are trading below potential recovery rates. Our significant short-term treasury position in the Strategy should allow us to take advantage of opportunities that present themselves as measured on a risk-adjusted basis. We are not in the unenviable position of having to raise liquidity to redeploy our capital. We plan to deploy capital judiciously when we believe the probability of loss is low and the likelihood of positive returns is high. The portfolio continues to remain relatively in a short duration (approximately 2.1) although we would consider extending if the 10 year treasury reaches the 4.5% area. While the yields on our overall portfolio are 5.05% YTM and 4.85% YTW, respectively, the yields on invested capital (excluding cash and short-term treasuries) within the portfolio are 7.26% YTM and 6.86% YTW, respectively, at this time. This is where the opportunity lies, as we believe there is not only significant yield available at this time, but we expect our entry points to create the potential for significant principal gains as well. As of this writing we have begun to deploy capital into the opportunities cited above, and expect to reach price targets for more items in our bullpen in the coming weeks.